Unemployment Spikes To 8.1% – A Higer Close Would Mark Temporary Support!

March 6, 2009
Author: Peter Stolcers, Founder of OneOption

The selling momentum has increased and buyers are nowhere to be found. Once the market broke through the November lows, bottom pickers abandoned the cause and put their wallets away. This has been a particularly tough week and I expected early weakness today with a possible rebound later in the day. Worst case scenarios are materializing, however they are already priced in. The unemployment rate spiked to 8.1% and another 651,000 jobs were lost in February. The numbers for December and January were revised to 681,000 and 655,000 respectively. Since the recession began 14 months ago, 4.4 million jobs have been lost. On average, analysts were expecting the unemployment rate to rise to 7.9%. The president continues to outline his plans and the market is fighting him every step of the way. Social programs are the focus and their affect is temporary. Profitable businesses are laying off workers to stay ahead of the curve and there have not been any incentives to stimulate investment. In fact, businesses are being slapped with higher taxes and in the case of oil companies, windfall profit taxes. There is also a mandate for ALL small businesses to offer 401(k) plans to their employees. This is going to place a burden on small businesses and apparently the average worker has no clue of how to open an IRA account. Small businesses that make over $250k will also see higher taxes. Capital gains taxes on investments will increase at a time when capital needs to flow into the equity markets. Healthcare stocks and energy stocks represent the two areas for potential job growth in our nation and both sectors are in a precipitous decline. The healthcare reform plan threatens profits and companies are holding off on investment decisions until they have clarity. Energy companies could be exploring for more oil and creating jobs in America. Instead, they are being slapped with higher taxes and they are not expanding operations. Finding new domestic reserves would create jobs and it would reduce our trade deficit (strengthen the dollar). The market has had a chance to assess the president's plans and after the initial shock, prices will stabilize and traders will wait to see how it all plays out. Dire economic news continues to flow in and to a large degree that has been discounted. There are potential signs of improvement. As I've been mentioning this week, China is a potential bright spot. Their PMI has grown for three consecutive months and they are doubling their stimulus plan. In the financial sector, Wells Fargo claims that business is brisk and Northern Trust is giving back its TARP money. The first signs of improvement from the financial sector will spark a huge rally. The potential "fly in the ointment" is a bank failure in Eastern Europe. That could have a devastating ripple effect. If it doesn't happen in the next month, our market could stabilize. Europe poses the greatest danger that this stage. ECB President – Trichet is a moron and he kept interest rates at 4% well after the signs of a global economic crisis were evident. Now the entire EU is in danger because every country is fighting to avoid its own financial collapse. The “U” in EU is quickly fading. The market is grossly oversold. That alone is not a reason to buy. It can continue to stay in an oversold condition for a long period of time. However, the easy trade has been to short this market. Traders are piling on short positions and when the first back-to-back rallies materialized, bears will be aggressively taking profits. If we get an afternoon rally, there is a good chance that the decline will stall. We might even see a nice bounce. If the market can distance itself from these lows, it should also be able to weather option expiration. On the other hand, if the market continues to drift lower and flounder, option expiration will have a negative bias and this down leg will continue. The early rally played right into the bear’s hands. They were able to aggressively sell on the open and they gained momentum. The selling has abated and after a bloodbath this week, I question how aggressive they will be heading into the weekend. We might see a decent intraday decline and a small bounce this afternoon. As I mentioned before, a nice afternoon rally would mark a temporary low. There isn't any good news to start that rally so the likelihood is small. It would have to be sparked by program trading and a short squeeze would ensue. I have half of my naked put positions on right now and half are profitable and the other half are close to the short strike prices. I will not add until I see some buying into the close. When that materializes, I will add to my positions. I like commodity stocks and tech at this juncture, but I am looking at each stock independently. image

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